TOKYO (Reuters) - The Bank of Japan kept monetary policy steady on Thursday but once again pushed back the timing for achieving its ambitious inflation target, reinforcing views it will lag well behind other major central banks in scaling back its massive stimulus programme.
With robust exports and private consumption pointing to a steady though modest recovery, the Japanese central bank slightly raised its growth forecasts and offered a more upbeat view of the world’s third-largest economy than last month.
But stubbornly weak price growth forced the BOJ to cut its inflation forecasts, underscoring the challenges the central bank faces as it tries to reflate the economy and coax consumers to spend more.
“Recent price developments have been relatively weak, as companies remained cautious in raising wages and prices,” the BOJ said in a quarterly report on its long-term projections.
“Risks to the economy and price outlook are skewed to the downside,” it said, conceding it has proved harder than expected to change public perceptions that deflation will persist.
The BOJ pushed back by a year the timing for hitting its 2 percent inflation target, in a fresh blow to Governor Haruhiko Kuroda’s radical monetary experiment aimed at sustainably ending deflation.
It now expects inflation will not reach that level until sometime in the fiscal year ending in March 2020.
The BOJ has postponed the price target timeframe six times since Kuroda launched his huge asset-buying programme in 2013.
Kuroda said while the delays were “unfortunate,” they would not erode confidence in his policies as inflation remained low partly due to factors beyond its control, such as weak oil prices.
“It’s not true that just because our forecasts proved to be wrong, we lose (the public’s) trust in our policies.”
He also dismissed the view the BOJ was running out of policy ammunition, arguing that maintaining its massive stimulus alone would help boost growth and inflation.
“We think the momentum for hitting our price target remains intact and can be sustained under the current policy framework.”
But some analysts say the BOJ is caught in a bind.
“Central banks in the United States and Europe are headed toward higher rates and balance sheet reduction, but the BOJ is headed in the opposite direction,” said Hiroaki Muto, economist at Tokai Tokyo Research Center.
“The message seems to be the BOJ is prepared to maintain easy policy indefinitely.”
As widely expected, the BOJ maintained its short-term interest rate target of minus 0.1 percent and its 10-year government bond yield target of around zero percent.
The central bank also kept intact guidance that it would keep buying government bonds so its holdings increase at an annual pace of 80 trillion yen ($714 billion), which many markets watchers say is unsustainable.
While companies were facing rising labour costs from a tight job market, many of them were making ends meet by hiring more temporary workers and streamlining operations, the BOJ said.
Such efforts are weighing prices, creating a disconnect between stronger economic activity and low inflation, it said.
Kuroda said he saw no need to ramp up stimulus now because such cost-cutting efforts would eventually reach a limit and force companies to raise wages more.
Still, low inflation would put the BOJ far behind the U.S. Federal Reserve, which has been slowly raising interest rates and is expected to announce detailed plans in September to start shrinking its balance sheet.
The European Central Bank (ECB) is also expected to announce plans in coming months to taper its asset purchases as growth picks up on the continent, according to a Reuters poll.[ECB/INT]
Both the Fed and the ECB are also facing stubbornly low inflation that is puzzling policymakers and economists, though levels are not as tepid as Japan’s.
To be sure, the BOJ raised its economic growth projections for the current and next fiscal years, in a testament to the improving economy.
“Japan’s economy is expanding moderately,” the BOJ said, a brighter assessment than last month when the central bank said it was turning toward a moderate expansion.
But it slashed its consumer inflation forecasts for the year ending in March 2018 and the following year, to 1.1 percent from 1.4 percent, and to 1.5 percent from 1.7 percent.
Even after the downward revisions, Capital Economics said the BOJ’s price forecasts remain too optimistic.
Japan’s economy grew at an annualised 1.0 percent in the first quarter thanks to robust global demand for its exports and a pick-up in private consumption. But core consumer prices in May rose just 0.4 percent from a year earlier, well below the BOJ’s target.
($1 = 112.0700 yen)
Additional reporting by Stanley White and Minami Funakoshi; Editing by Kim Coghill